Why TV Programming Costs Are Growing (Analysis)

Expenses are up, but so is revenue as splashes like the networks' $3.1 billion NFL deal and Fox's new cable channels reveal a fresh battleground -- says one analyst, "It's becoming more expensive to attract a viewer."

Hollywood conglomerates are reporting solid quarterly results, with revenue growth at TV networks often outperforming Wall Street expectations. So it makes sense that media companies seem to be spending more on television programming while simultaneously reining in their film units, with layoffs at Disney's Pixar studio and a Nov. 21 declaration by Sony Pictures Entertainment that it will lower its yearly output to about 18 movies the latest examples.

While the conglomerates don't disclose too many specifics, analysts have been noting rising TV programming costs, especially at the core cable networks, which now provide a majority of profits. For instance, after the current NFL season, Fox, NBC and CBS will collectively pay $3.1 billion a year through 2022 for pro football, up from $1.9 billion annually.

But even beyond sports, one of the key themes this earnings season has been "the upward trend of program costs," says UBS analyst John Janedis. Amid the proliferation of original TV content, "it's becoming more expensive to attract a viewer to a network."

Morgan Stanley analyst Benjamin Swinburne says an increase in content investment was particularly pronounced at 21st Century Fox and CBS, though it was accompanied by double-digit percentage growth in revenue at the relevant units. And Comcast said that in its third quarter, NBCUniversal's cable networks spent 3.8 percent more on programming and production costs -- including its launch of English Premier League matches on NBC Sports Network -- but that it still managed a 5.4 percent increase in cash flow.

Programming expenses for the third quarter at CBS Corp., meanwhile, increased 20 percent to $552 million, largely because of Showtime's Floyd Mayweather Jr. boxing match, the top-grossing pay-per-view event ever. CBS also spent big on summer programming, including an expanded Big Brother, new episodes of Unforgettable and the debut of Under the Dome. CEO Leslie Moonves says it was well worth it, considering CBS reported more revenue, operating income and earnings per share than in any third quarter in its history.

At Viacom, which like CBS is controlled by Sumner Redstone, programming costs jumped $194 million, or 7 percent, in the just-ended fiscal year, while revenue at its media networks segment rose 5 percent. But CEO Philippe Dauman doesn't mind the higher spend. "A year ago, we pledged to redouble efforts to return ratings momentum, and we delivered on that promise," Dauman said, highlighting MTV's Catfish: The TV Show, Teen Wolf and Awkward.

Time Warner CFO John Martin, who will take over its Turner networks next year, told investors recently that he hopes to keep cable programming cost increases at no more than mid- to high-single digits. But he acknowledged the company will be closer to the high end of that range when a new deal with Major League Baseball kicks in that has TBS, Fox and ESPN paying $12.4 billion for eight years of broadcasting rights, a 100 percent increase.

Time Warner, which spends about $5 billion a year on programming between HBO and the Turner networks, also is ramping up spending at CNN under Jeff Zucker. "Programming investments will likely put some pressure on CNN's margins," Martin acknowledged.

21st Century Fox reported $50 million in extra spending in the latest quarter on new networks Fox Sports 1 and FXX, which contributed to a 2 percent drop in its cable networks' operating profit. (Among the early FS1 disappointments has been the ratings for Fox Sports Live, the network's version of ESPN's SportsCenter.) Disney, too, has seen programming costs dent cable profits, though it's nothing it can't easily absorb.

In fact, analysts believe the spending is evidence of the old adage: You've got to bet big to win big, and the TV sector is where to place bets these days. Notes Sanford C. Bernstein analyst Todd Juenger, "Content spending is increasing but for now is being immediately offset by revenue."